Module 1 of 2 · 60 minutes
Where the cash is trapped and how to release it
By the end of this module you will be able to
- Calculate the cash conversion cycle from the accounts
- Diagnose which stage is consuming cash
- Apply practical improvements at each stage
- Explain the working capital cost of growth
Amara A business needs cash inside a month. Where does it look first?
Nadia At what it is already owed. Not the bank, not the supplier terms, not pricing. Most businesses that feel short are owed more than they need and have never made collecting it anybody's named job.
Amara Most of them would say they do chase.
Nadia Intermittently. Late payment is rarely refusal, it is the absence of a request. Invoices nobody asks about are paid after the ones somebody telephones about, consistently, in every sector.
Amara What is the second place to look?
Nadia The invoicing date. A business delivers on the second of the month, invoices at month end, then waits thirty days from there. That is four weeks of cash given away for nothing, permanently, every month.
Amara And stock.
Nadia Look for what has not moved in twelve months, and treat volume discounts with suspicion. Five per cent off for eight months of a product that sells in two is not a saving. It is six months of cash on a shelf, and a shelf pays no interest.
Amara On the payables side, is the answer simply to pay as late as possible?
Nadia Use the agreed terms fully and do not exceed them. Beyond terms you lose priority when stock is scarce, you lose settlement discounts, and a small supplier may not survive carrying you. That is not a relationship you rebuild cheaply.
Amara You said working capital scales with growth.
Nadia Roughly proportionally. Double the sales and you double the stock and the unpaid invoices, both funded before any new customer pays. The large contract everybody celebrates is frequently what breaks the business, and the profit on it is irrelevant until the money lands.
The written material
The cycle
Cash buys stock. Stock sits. Stock sells and becomes an invoice. The invoice sits. The customer pays and it becomes cash again. The time from paying for stock to being paid for it is the cash conversion cycle, and every day of it is a day you are funding somebody else.
Stock days plus debtor days minus creditor days gives the figure. Creditor days subtract because your suppliers are funding part of the cycle for you, which is the cheapest finance most businesses will ever get.
- Stock days: how long stock sits before it sells
- Debtor days: how long customers take to pay
- Creditor days: how long you take to pay suppliers
- Cycle: stock days plus debtor days minus creditor days
Releasing cash at each stage
Stock is released by ordering less more often, by identifying lines that have not moved in a year, and by resisting the volume discount that buys eight months of a product you sell in two.
Debtors are released by invoicing on the day of delivery rather than at month end, by making the payment terms explicit before the work starts, and above all by making the chasing somebody's named job. Most late payment is not refusal, it is that nobody has asked.
Creditors are managed by using the terms you agreed, fully, and not beyond them.
Why growth costs cash
Doubling sales roughly doubles the stock you must hold and the invoices you are waiting on, and both are funded before any of the new customers pay. A business growing quickly can be more fragile than the same business standing still.
This is why an order that looks like a triumph can be dangerous: a large contract on long payment terms may require more cash up front than the business has, and the profit on it is irrelevant until the money arrives.
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